Wall Street’s fear gauge, known as the VIX, experienced its second-largest percentage spike in history on Wednesday. This surge followed the Federal Reserve’s announcement of scaling back its rate-cutting efforts, causing a significant impact on the stock market.
The CBOE Volatility Index soared by 74% to reach a closing value of 27.62, a sharp increase from its level of around 15 earlier in the day. This surge ranks as the second-highest in history, trailing only a 115% jump in February 2018 when there was a crisis in funds linked to the volatility index.
The Federal Reserve’s statement that it plans to reduce interest rates only twice next year, compared to the previously projected four cuts in September, unsettled investors who relied on low rates to sustain the bull market. Consequently, the Dow Jones Industrial Average plummeted by 1,100 points, marking its 10th consecutive decline.
Typically, a VIX value exceeding 20 indicates heightened market fear. Throughout the year, the VIX had remained below this threshold, causing concern among investors who perceived the market as excessively complacent.
The VIX is determined by the pricing of put and call options on the S&P 500. A spike in the VIX may signal investors rushing to buy put options as a protective measure against market declines.
Another notable VIX surge occurred on August 5, 2024, ranking as the third-largest in history. This surge, driven by fears of a U.S. recession and a significant unwinding in the yen carry trade, led to a roughly 65% increase in the VIX, closing above 38 and briefly exceeding 65 intraday.
By Thursday, the VIX had decreased to slightly above the 20 mark, representing a decline of over 25% from the previous day’s level.
